After six long years of house price falls, Croatia’s property market is now recovering, with the economy improving.

During 2015, the average price of new dwellings sold in Croatia was HRK10,688 (€1,420.60) per square metre (sq. m.), up by 1.6% (1.9% inflation-adjusted) from a year earlier, according to the Croatian Bureau of Statistics (CBS).

In Croatia’s capital, Zagreb, the average price of new dwellings sold dropped slightly by 1.3% (-1% inflation-adjusted) y-o-y to HRK11,797 (€1,568) per sq. m. in 2015.

In other settlements, the average price of new dwellings sold rose by 3.6% (4% inflation-adjusted) y-o-y to HRK9,617 (€1,278) per sq. m. over the same period.

During the year to end-February 2016, the average asking price of flats in Zagreb increased 1.01% to €1,598 per sq. m., according to CentarNekretnina.

The Adriatic Coast performed spectacularly, with the average asking price of flats surging by 15.57% y-o-y to €1,826 per sq. m. in February 2016, thanks to increasing interest from international homebuyers.

Croatia’s property market has been depressed for years, as the global financial crisis and the eurozone crisis, hit the country’s tourism-oriented economy.

In 2014, the market started to recover, with the national property price index increasing by 1.22% (1.69% inflation-adjusted)

The total number of dwellings sold surged by almost 21% to about 2,410 units in 2014 from a year earlier, according to the CBS. Of these about 47% were in Zagreb while the remaining 53% were elsewhere. The total useful floor area of all dwellings sold also rose 27.4% to 157,316 sq. m. over the same period.

This coming year “the average property price is expected to slightly increase due to landmark projects already on the market and coming to the market,” said Colliers International. “The Croatian real estate sector expects several developments and transactions in 2016, underpinned by better economic climate, yield opportunities and improved investor sentiment.” Moreover, demand from wealthy European homebuyers is expected to increase.

After six years of economic recession, Croatia’s economy grew in 2015, with GDP growth of 1.6%, thanks to strong tourism on its Adriatic Coast. The economy is expected to expand by 2.1% this year, the highest growth since 2007, according to government estimates.

Croatia's housing market has sometimes moved almost counter-intuitively, surging in bad times. That may be because wealthy Croatians traditionally park their wealth in housing in times of uncertainty. For instance, when the economy started to weaken in late 1998, demand for new housing increased substantially. The average price of new houses rose by almost 20% in 1999 - the year of President Fradjo Tudjman’s death - while the economy contracted 0.8%.

Total roundtrip transaction costs are high, ranging from 10% to 15% for old properties. The bulk of the cost is accounted for real estate agent’s fees, at 3% to 6%, split between buyer and seller. The real estate transfer tax is 5% but does not apply to the first sale of new buildings. Instead, the sale is subject to 25% VAT on the net construction value.

Rent: There is neither rent control nor a maximum deposit. One or two month’s deposit is customary.

Tenant Eviction: Evicting over-staying tenants can be difficult. Zagreb’s courts are clogged, and cases take time. Informal methods of using ‘agencies,’ i.e., thugs, are common and tend to be recommended by realtors.

After six years of economic recession, Croatia’s economy finally grew in 2015, with GDP growth of 1.6%, thanks to strong tourism on the Adriatic Coast. Despite this, Croatia has obviously not yet fully recovered. From 2009 to 2014, the economy lost more than 12% of GDP, Europe’s second-biggest contraction after Greece. The economy contracted by 7.4% in 2009, 1.7% in 2010, 0.3% in 2011, 2.2% in 2012, 1.1% in 2013, and 0.4% in 2014, based on figures from the International Monetary Fund (IMF).

The economy is expected to expand by 2.1% this year, the highest growth since 2007, according to government estimates.

Croatia’s most serious problem is high unemployment, the third highest in the EU, following Greece and Spain. In January 2016 unemployment stood at 16.4%, down from 17.5% the previous year, according to the CBS. Youth unemployment was 44.1% in January 2016.

In the November 2015 parliamentary elections, the centre-right coalition, led by the HDZ won 59 seats and declared victory. But this is well below the 76 seats needed for a parliamentary majority.

The new government is already losing investor confidence and alienating international creditors, focusing on ideological and political quarrels and not on investment and reforms.

"If the government turns quickly to legal changes to make the country more attractive to investors, we could have higher growth in the future which would also help the fiscal consolidation. A lot depends on how strong the ruling coalition is," said Marina Tkalec from the Zagreb Economic Institute.

In March 2016, Moody’s Investors Service downgraded Croatia’s credit rating from Ba1 to Ba2, with negative outlook.

Unlike other new European Union members, which experienced an economic boost after their accession, Croatia joined the EU on July 1, 2013 when the EU was struggling. Since the beginning of 2014, Croatia has been in the European Commission’s Excessive Deficit Procedure (EDP) due to its high budget deficits and public debt. The EU is now urging the country to reduce the budget gap to below 3% and the public debt to sustainable levels.

The country’s public debt was 86% of GDP in 2015, slightly up from 85.1% of GDP in 2014, according to the European Commission. The country’s budget deficit was about 4.2% of GDP in 2015, from around 5.6% of GDP in 2014 and 4.6% of GDP in 2013, according to the European Commission. The Croatian government hopes to narrow the deficit to 2.7% of GDP this year, though international organizations regard this as too optimistic.

Inflation was -0.3% in 2015, from 0.2% in 2014, according to the European Commission. The inflation rate is expected at 0.3% this year before accelerating to 1.6% in 2017. From 2004 to 2013, the country’s average annual inflation rate was 2.9%, according to the IMF.

Strong tourist rental market

Moderate tax rates

Multiple foreign ownership limits

Moderate to high transaction costs

Vulnerable & unstable economy

RESIDENTIAL PROPERTY FACTS

Price (sq.m):
€1,051 For a 120 sq. m. property, usually an apartment.

Rental Yield:
5.63% For a 120 sq. m. property, usually an apartment.

Rent/month:
€592 For a 120 sq. m. property.

Income Tax:
8.40% Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income.

Roundtrip Cost:
22.53% The total cost of buying and then reselling an apartment. Includes: